The Fiscal Cliff: In Depth

Since President Obama’s reelection one issue has been the main discussion topic of political news and talk radio, “The Fiscal Cliff”. But what is the fiscal cliff?

The “fiscal cliff” is a term created by the GOP in attempts to incite fear and cause President Obama to renew the Bush Tax Cuts once again.

Midnight on December 31, 2012 would have marked the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of a few tax breaks for business owners, shifts in the alternative minimum tax that would take a larger bite, a rollback of the “Bush tax cuts” from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 would have begun to go into effect.

According to Barron’s, over 1,000 government programs – including the defense budget and Medicare (were) in line for “deep, automatic cuts.” Of the two, the tax increases were seen as the larger burden for the economy.

Fiscal Cliff Timeline

The history of the debate is as follows, On November 8th, Senate Majority Leader Harry Reid (D-Nev.) told the media that, “We are not going to mess with Social Security” in fiscal-cliff deal.

The same day, Speaker John Boehner (R-Ohio) delivers a carefully written speech via teleprompter, offering $800 billion in revenue. Telling ABC News, “The election’s over.

Now it’s time to get to work.” On November 13th Obama offered a plan offering proposing $1.6 trillion in tax revenue and $400 billion in spending reductions, which wasn’t even considered by the GOP.

On November 15th Senate Minority Leader Mitch McConnell (R-Ky.) called Obama’s proposal a “joke.” The following day, Reps. Boehner and Nancy Pelosi (D-Calif.) and Sens. Reid and McConnell meet with Obama. The leaders expressed optimism, saying the meeting was “constructive” and the stock market reacts favorably.

On November 27th, Rep. Tom Cole (R-Okla.) called on his party to pass Obama’s tax plan. Boehner and other GOP leaders said they disagreed with Cole. Still on the 29th rank-and-file Republicans break with conservative activist Grover Norquist and the tax pledge he has spearheaded. Amid the impasse, Reid says he doesn’t “understand [Boehner’s] brain.” Obama showed rare resolve telling Sen. Cole at a White House Christmas party on December 3rd, “Seriously, I will go further on this thing than you guys think.”

House Republican leaders make a counteroffer that would cut $2.2 trillion from the deficit with a combination of spending cuts, entitlement reforms and $800 billion in new tax revenue and the House GOP cracked whip, bouncing four members off panels in effort to foster unity. A day later, White House press secretary Jay Carney called GOP fiscal-cliff deal “magic beans and fairy dust.” While the Democrats insisted that increasing tax rates must be part of any agreement.

On December 6th Treasury Secretary Timothy Geithner said on CNBC that the Obama administration is willing to go over the cliff if GOP doesn’t bend on tax rates.

Sen. McConnell filibustered his own amendment in order to allow the president to increase the debt ceiling after Democrats appear to have the votes to pass it.

On December 7th Pelosi met with Obama at the White House still little progress.

Four days later Obama predicts GOP will cave on taxes later that day Obama and Boehner met and a deal appeared to be within reach as Boehner compromised on tax rates and Obama puts Social Security adjustment on the table and moves tax threshold from $250,000 to $400,000.

Then the most embarrassing spectacle happened on December 18th. Boehner brought his “Plan B” on the fiscal cliff to the House calling for a vote on legislation to extend tax rates on annual income under $1 million. A day later Obama invoked the Connecticut shootings to attempting bring incite to Congress on the fiscal cliff: “If this past week has done anything, it should give us some perspective.” That day Boehner said Plan B will pass and even Grover Norquist said Plan B does not violate the Americans for Tax Reform pledge. On December 20th Majority Leader Eric Cantor (R-Va.) said Plan B would pass and Obama sounding like a Public Defender said, “Take the deal.” Sadly, later that day, Lacking the votes, Boehner cancels vote on Plan B bill. Boehner says it’s up to the Senate to act. Next Obama met with Harry Reid and talked to Boehner via phone. He tells the press that lawmakers should cool off over Christmas — “drink some eggnog, eat some Christmas cookies” — and then address the fiscal cliff. With that Obama headed to Hawaii for Christmas returning on the 26th. Then the Treasury Department announced the U.S. government will hit the $16.4 trillion debt limit on Dec. 31 and will have to resort to “extraordinary measures” to continue borrowing. A dismal Reid said it is likely too late for Congress to pull the nation back from the fiscal cliff. But finally on the 28th Congressional leaders met with the president at the White House. Obama said he was “modestly optimistic” that a fiscal-cliff deal could be reached as Reid and McConnell sought to reach an agreement. Stocks closed lower for the fifth straight day amid fears there will be no deal on the fiscal cliff. Still on the 30th McConnell and Reid failed to reach an accord amid disagreements on Social Security, defense sequester and estate tax. McConnell calls Vice President Biden to jump-start talks. With Joe on the job on the 31st before the stock market opened, reports indicated that there was major progress on a deal. When markets close, no bill has been released and congressional aides acknowledge that the U.S. will go over the cliff. Earlier in the day, Obama had criticized Congress at a White House event, infuriating some Republicans on Capitol Hill.

Disregarding GOP angst Biden and McConnell finalize a deal that sets the tax rate threshold at $450,000 for families and $400,000 for individuals. That agreement delayed sequester but did not include significant spending cuts. At the last minute on New Years day The Senate passed the deal, 89-8. House Republicans vow to review the Senate-passed bill.

House Republicans balk at $4 trillion bill and consider amending it. Lacking the votes, House GOP leaders schedule voted on Senate legislation. It passed, 257-167, with the support of only 85 Republicans. Boehner voted yes while Cantor and Majority Whip Kevin McCarthy (R-Calif.) voted no. Obama holds press conference with Biden to tout the passage of the measure as a victory but who won?

Victory?

By most accounts, President Obama won the fiscal cliff showdown. I cannot fathom how the deal he struck can be considered a win for him or the average American. In fact the deal made most of the Bush tax cuts PERMANENT. One of the main reasons the president won is due to his mandate, forged during the election, for the wealthy to “pay their fair share.” During the election he said that he couldn’t in good conscience ask seniors and college students to take a hit from budget cuts without asking the wealthy to pay their fair share. He wanted “shared sacrifice” and a “balanced approach” because we’re “all in it together.” The president’s conscience must be bearing a heavy load this year.

One of the biggest signs that the deal wasn’t in the best interest of the average American is that Grover Norquist is happy. After the fiscal cliff deal was passed in the House, he pointed out that Obama blinked on his $250,000 line in the sand on taxes and that, by locking in the Bush tax cuts for 98% of Americans, the Democrats’ ability to defend the legacy of the New Deal has been greatly diminished. I’ll be d-mned he isn’t absolutely correct!

As David Horsey recently pointed out:
[T]he mandarin of the anti-tax movement, Grover Norquist, is coming out of this showdown with a big smile on his face, which should make Democrats wonder if their “victory” is a bit of an illusion. Norquist has kept Republicans in line for years by making them take his pledge to never, ever raise taxes.
On this deal, though, he gave them a pass. In fact, he expressed support for the final deal. Why? Because, as he points out, it gives Republicans what they have claimed to want ever since they implemented the tax cuts a decade ago: permanence. Not for everybody — the top 2% of Americans will be paying more — but 98% of taxpayers now have their tax breaks locked in.

Horsey’s view is echoed by other conservative commentators like Tom Rogan who, quite accurately, point out that:
In raising the income threshold for the top tax bracket to $400,000 for individuals and $450,000 for couples, the agreement accomplishes another critical conservative objective — limiting the federal government’s ability to extract wealth from taxpayers. This is an exigent need. Why? Because it is impossible to build an American welfare state on the back of a “rich” class who already provide over 70 percent of all tax revenue. By accepting a raised threshold on “richness,” whether he knows it or not, Obama has limited his ability to build the tax base necessary for a welfare state. Just look at the U.K., where because of state expenditures, income over $56,000 is taxed at a minimum level of 40 percent. This is why liberals are in uproar. The cliff deal has struck a hammer blow against their long term ambitions.

And if you think that this is just the work of Republican operatives rationalizing a defeat, consider Paul Krugman’s assessment of Obama’s big win:

For the reality is that our two major political parties are engaged in a fierce struggle over the future shape of American society. Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy. Yes, it’s essentially a class war.
The fight over the fiscal cliff was just one battle in that war. It ended, arguably, in a tactical victory for Democrats. The question is whether it was a Pyrrhic victory that set the stage for a larger defeat . . the G.O.P. retains the power to destroy, in particular by refusing to raise the debt limit — which could cause a financial crisis. And Republicans have made it clear that they plan to use their destructive power to extract major policy concessions.
One of the key reasons the deal might be considered a short term win by some in Democratic circles is because it did not include benefit cuts like the rumored “chained CPI” reform to Social Security. The deal also included a tax increase on the wealthy that makes our tax code more progressive than it has been since 1979. That said, an analysis with some historical perspective exposes this as pretty small potatoes.

As Annie Lowrey of the New York Times points out, this deal only raises taxes on the wealthy very slightly from historic lows:
By some measures, the tax code might now be the most progressive in a generation, tax economists said, while noting that every American is paying a lower burden currently than they did then. In fact, the total federal tax rate is still vastly lower for the very rich than it was at any point in the 1940s through 1970s. It has risen from historical lows, but is still closer to those lows than where it was in the postwar decades.

“We made the system more progressive by raising rates at the top and leaving them for everyone else,” said Roberton Williams of the TaxPolicyCenter, a research group based in Washington. “The offsetting issue is that the rich have gotten a lot richer.”
Indeed, over the last three decades the bulk of pretax income gains have gone to the wealthy — and the higher up on the income scale, the bigger the gains, with billionaires outpacing millionaires who outpaced the merely rich. Economists doubted that the tax increases would do much to reverse that trend.

Hence, the tax burden on the rich is still far closer to historic lows than to the levels paid in the past when that revenue built the American infrastructure, funded education, wove our safety net, and much more. Since the late seventies there has been a massive redistribution of wealth upward. The new taxes on the rich do next to nothing to address that inequality in any significant way. Far from a big hit, they represent the political equivalent of a love tap.

Nonetheless, now that Obama has won this smallest of concessions, odds are that the right will engage in the same old shock doctrine politics of crisis to push for draconian spending cuts aimed at gutting the size of the federal government. Any step in that direction by the White House is a win for the right. And with his embrace of the crappy Simpson-Bowles austerity plan, Obama has already signaled that everything, including entitlements, is very much “on the table.”

As I have noted many times before in this column, by centering the conversation on deficit reduction, Obama is playing on Republican turf. This may be politically clever for him personally and appealing to what Krugman calls “the centrist fantasy,” but it may be fatal for the hopes of progressives.

Robert Reich has noted time and again that, “job growth and wage growth should be the central focus of economic policy, not deficit reduction. Yet all we’re hearing from Washington — and all we’re likely to hear as Republicans and Democrats negotiate over raising the debt ceiling — is how to cut the deficit.”

Reich makes this point because, as we slowly come out the Great Recession, the deficit is actually shrinking. And the threat of rising future debt largely comes from “rising health care costs” that would have been better contained with a single payer system rather than the corporate health care reform that is Obamacare.
But how to amend the Affordable Care Act to further contain health care costs will never be on the radar screen of this Congress. Instead, there will be more demagoguery about spending from the right, and we are apt to see real pressure to cut Social Security and Medicare as well as take the axe to nearly every other thing the government does.

Are we winning with Obama or are we losing while he wins? I’m just saying….

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